Should I Accept Blackstone Cash Offer For Croesus Retail Trust?

This week, Heartland Boy was forced to close the chapter on a cornerstone stock in his portfolio, Croesus Retail Trust. He first invested in Croesus Retail Trust in June 2015. Over a 27-month holding period, Heartland Boy managed to recognize an XIRR of 27.4% and an overall margin of 58% over his cost of investment. Again, this is a very satisfying return and quite similar to what he had achieved for Lippo REIT. What this also implies is that he will not have to decide between voting for or against Blackstone cash offer for Croesus Retail Trust. Yes, Heartland Boy has sold off all his shareholdings in the open market at 1.155. However, for those shareholders of this excellent high yielding REIT, the key question remains on 13 September 2017 – “Should I accept Blackstone cash offer for Croesus Retail Trust?” That is a real dilemma.

Blackstone’s Proposed Privatisation Of Croesus Retail Trust

On 28 June 2017, the Manager of Croesus Retail Trust announced on SGX that it has received a cash offer of $1.17 from affiliates of Blackstone Real Estate to privatize Croesus Retail Trust by way of a trust scheme. This piece of news did not come as a surprise to Heartland Boy as such rumours have already been prevalent ever since Croesus Retail Trust internalized its manager. Several analyst reports also confirmed and added to this market rumour.

On 22 August 2017, unitholders would have received the Scheme Document. More importantly, it included a “fair and reasonable” opinion from CIMB, the appointed Independent Financial Advisor (‘IFA’). A SIAS Dialogue Presentation for unitholders was also conducted on 30 August 2017. Basically, it explained the mechanics of Blackstone’s cash buyout via a scheme of arrangement. Unfortunately, Heartland Boy could not attend since he was still working in Jakarta on that weekday. The presentation slides can be found in this link. In summary, for the privatization to succeed, here are the conditions that must be met on 13 September 2017:

• “Head-count” condition of more than 50% in number of unitholders present and voting in person or by proxy on 13 Sep
• “Unit-count” condition of approval from more than 75% in value of the units held by the unitholders present and voting in person or by proxy on 13 Sep

Why Should Unitholders Accept Blackstone’s Cash Offer For Croesus?

Based on the facts laid out by the Manager, here are the reasons why unitholders should accept Blackstone’s cash offer for Croesus Retail Trust.

• Premium To Net Asset Value (NAV)

The cash offer of 1.17 per unit is a 20% premium to the Adjusted NAV as at 30 June 2017.  In layman terms, Blackstone is paying $1.20 for every dollar of Croesus’s real estate!

• Exceed All Analysts Target Prices

Blackstone’s offer is also superior as it exceeded all analysts’ price targets.

Analyst	Target Price	Date Of Report
DBS Vickers	$1.15	17 May 2017
Philip Securities	$1.08	16 May 2017
RHB	$1.00	15 May 2017

• Low Historical Trading Liquidity

Referencing the report from the IFA, the Manager cited that the historical trading and free float volume of the units has not been high in absolute terms relative to the market captialisation and free float. In layman terms, the Manager is implying that it may be difficult for existing unitholders to sell on the open market given the historical low trading liquidity.

Heartland Boy’s Strategy

As aforementioned in this article, Heartland Boy had already sold all his shareholdings of Croesus Retail Trust at $1.155 earlier this week. This was not a decision taken lightly, especially since Blackstone’s cash offer for Croesus Retail Trust was $1.17. Furthermore, by selling on the open market, he incurred commission fees (brokerage fees, SGX trading fees etc) of approximately 0.26% of the transaction value. Heartland Boy thinks that it is better to take money off the table now since there is a likelihood that the offeror may not succeed in its privatization by way of trust scheme. If it pans out that way, the share price may drop to pre-cash offer price of $1.05. That would present a decent buying opportunity given a 12-month trailing dividend yield of 7.3%. Note that this strategy is formulated based on what Heartland Boy had observed since Blackstone’s privatization of Croesus was made public. Here is why Blackstone may not succeed:

1. Large free float that are loosely held

Based on consultant reports, Croesus has a large free float ranging from 78% to 90%. In addition, the large free float is also very loosely held as shown in its 2016 annual report.

Substantial unitholders are also few and far between. GKG Investment Holdings (7.1%), Value Partners Ltd (4.8%) and Target Asset Management (3.5%) are the few institutional investors of Croesus Retail Trust. Interestingly, GKG Investment Holdings recently purchased Croesus in the open market at an average price of 1.177 (ex-div price = 1.1364) after the privatization offer was announced. In this article, GKG proclaimed that he is still undecided.

With a shareholding that is so loosely held, what this implies is that the “powers” can be vested on the man on the street as well. Resolutions that are put to the shareholders may not necessarily be “rubber-stamped” for approval. An example of this would be event of internalising the Manager of Croesus. 304 million units were represented at that Extraordinary General Meeting and only 66% voted to approve the internalization. This is definitely a rather low approval number and indicated that a significant number of unitholders were not too pleased about the internalization. Therefore, it is far from certain that the threshold of 75% approval will be met on 13 September 2017.

2. Online Sentiment  Is Not That Sweet

Besides talking to his peers, Heartland Boy also trawled news and online forums on Croesus Retail Trust to get a pulse on the sentiment of retail investors.

Of course, popular finance blogs were also not spared. Here are some screen shots of the comments left on AK’s blog.

Mr IPO even did an online poll and majority voted NO!

Perhaps, the sentiment is indeed not that sweet. Numerous reasons were cited:

• The real offer is actually 1.143 and not 1.17. That is because the most recent DPU of 4.06 cents declared were to account for distributions from 1 Jan 2017 to 30 June 2017. 3.60 cents dividend was also paid out for the period from 1 July 2016 to 31 Dec 2016. This gives it a total dividend payout of 7.66 cents. Theoretically, distributions from 1 July to end October 2017 are unaccounted. 4 months of dividends at pro-rata rate is approximately 2.68 cents. Therefore, the real cash offer is 1.143 and not the 1.17 that the headline is screaming about.
• Some unitholders simply refuse to sell because it is difficult to find such a good REIT/ business trust which can provide such solid dividend yield. This is an indirect reflection of unitholders’ satisfaction with the overall asset management of Croesus Retail Trust. Ironically, the Manager could be the victim of its own success!

Despite having executed his strategy, Heartland Boy will be keeping his eyes peeled on the developments at The Fullerton Hotel Singapore on 13 September 10am! He shall monitor proceedings via InvestingNote! The outcome would also allow him to review his strategy so that he can be equipped in future scenarios!